Stanley Black & Decker, Inc. (SWK) Earnings Call Transcript & Summary

All right. Well, thank you, everybody, for being here. Super excited to have Stanley Black & Decker with us today. We have Pat Hallinan, CFO; Dennis Lange, VP of IR. Thank you both for being here.

Well, thanks for having us.

No, I guess maybe kind of starting on the restructuring program in that journey. We've got -- the gross margin has gone from 20 -- a trough of 20% to about 30% today. How is the company able to run ahead of schedule on that program despite industry and your volumes coming in below what we would have expected 2 years ago?

Yes. Getting back to margin and balance sheet health are our top 2 priorities. They remain our top 2 priorities. And so to your point, we haven't had the macro tailwinds nor have we had -- other than some significant ocean freight deflation last year. We haven't had meaningful deflation tailwinds, either. It's really just been the collective effort of all of our teams, not just our ops and supply chain teams, attacking gross margin very maniacally. And we have every confidence we get to 35% by the end of next year. We'll be in the low 30s as we exit this year. And the horses we've been riding mostly to this point are big waves of strategic sourcing and fixed cost reduction via footprint reduction, both in our production facilities and our distribution facilities. I think for the journey that is through the end of '25, those are still going to be the 2 biggest horses. I mean, yes, there's other levers we're pulling around in-plant productivity or SKU reduction, some of the early stages of product platforming, but overwhelmingly the journey from '22 to '25 is mostly a sourcing and fixed cost journey. And those won't stop. I don't think 35% is necessarily an endpoint. We're going to be pushing the organization to move beyond that. And I think to the extent we find success moving beyond that, it's going to be on the backs of platforming and further footprint reduction.

I appreciate that. As you continue to build to that 35% plus, does every 100 basis points get harder than the previous? Or are you setting a foundation that's maybe not making it more difficult?

Well, I mean, harder in the sense that part of the -- very first part of the journey was consuming expensive inventory, right? So that was time, right? And it doesn't get much easier than just waiting for time to pass. But I would say harder only in the sense that it becomes more cross functional, right? You can have global supply chain teams with a modest chunk of product engineering, go chase strategic sourcing. Once you're in the product platforming, or very significant kind of the latter stages of the footprint reduction. There's just more revenue at risk or more what is the content in a product and how competitive does it make it. But we don't see the incremental difficulty increasing exponentially. I mean it's manageable, that glide path. It just means the latter stages of our journey to 35% and the journey beyond 35% is a much more cross-functional journey than the early innings were.

Appreciate that. And how -- what kind of savings does the company need to deliver next year on the restructuring to -- trying to hit that 35% exit rate? And are you guys seeing it come through the balance sheet, those savings?

Yes. I would tell you that our -- effectively, we're piling on the savings 6 months before they show up in the income statement. So getting to 35% by the end of 2025 effectively means that by July of next year or sooner, we've kind of done the programmatic work, and it's kind of onto our balance sheet. And yes, we're tracking at that trend, and we'll need every bit of about $500 million next year in terms of economic savings delivered. Now that will be for the most part on our balance sheet by, like I said, July or thereabouts, and it will roll off the balance sheet in the back part of the year.

You mentioned that 35% is not the end game, that you guys believe that it could go something above that. To get above 35%, does there need to be maybe changes in mix, changes in the portfolio, pricing? Like is there other levers?

No. I would say that when we're talking about gross margin, especially in the near and medium term, we're talking about it from kind of a price/cost neutral, volume-neutral environment. Obviously, on the margin, if there were mid-single-digit volumes or better, that could be a helpful tailwind, but we're not betting on that, at least not for '25. And it's not part of our recipe on our long-term gross margin journey, it would always be welcome and helpful. I think it really comes down to can we accelerate platforming and can we dial in our footprint best. I'd say that those are the opportunities. I would say things like mix and product lines are manageable. I would say, if anything, they're manageable risks on the journey as opposed to [ help ].

Yes. Yes. Maybe on portfolio rationalization, the company eliminated a very high number of SKUs over the last kind of year plus. I mean where do you stand today on that SKU rationalization? And did that process have any impact on company sales?

Yes. For those who aren't familiar, when we set out on this journey, we had to put some SKU rationalization in as a mix really to be able to pace the footprint reduction in the strategic sourcing because those are just much more difficult journeys, if you're dragging the whole tail with you. And we identified about 70,000, 80,000 SKUs that were tied to about $50 million of revenue. And we're through much of that journey. We're probably 2/3, if not beyond 2/3 of that journey. We haven't really seen a big volume headwind. I mean I think the volume headwind has been a macro dynamic, not a SKU reduction dynamic. And we're through most of that journey. I think as we go forward, further SKU rationalization will be much more on the backs of product platforming. Just a kind of natural evolution of how do you view product life cycle management and new product development in a way that is intentional on component complexity, subassembly complexity or in finished SKU complexity. So I don't -- again, like 35% gross margin is not an endpoint. I'd say the wave of SKU reduction we talked about was an enabler to footprint reduction. I think from here, it's much more about good product life cycle management than new product development.

Yes. I mean it's a very high percentage of SKUs to be removed and to a very low percentage of revenue or volumes to be impacted. How is the company able to do that? Was it just substituting like-for-like product?

Correct? And also things that just weren't generating a lot of revenue. I mean, I would say probably something like 20,000 of those SKUs were things like people weren't really even actively ordering, right? It was just complexity because you end up with -- somewhere those components are in your system, somewhere those -- that packaging is in your system. So part of it was we were stretching some of our smaller brands probably beyond their natural boundaries and we needed to take a brand like LENOX that has a history in cutting tools and kind of get it back to its roots.

Yes. Beyond just rationalizing SKUs, the company, even kind of predating you, has been simplifying the portfolio, whether it was security, oil and gas, most recently attachment tools. I guess what has -- maybe that -- becoming more of a tools focused company, what has that done for you guys? And what do you think it will do for you in terms of whether it's innovation, selling efforts? How does it help?

Yes. I mean, I think it just helps with deploying talent and capital, right? We're very focused around our tools and outdoor business. And then even on the industrial side of things because we sold like the Infrastructure business, the Epiroc last year, it's -- the Industrial business is increasingly fastener centric or whether it's handheld or robotic equipment to insert those fasteners. And so the business is getting much more focused. So therefore, the money we invest to understand the end markets or to deploy talent or capital against those end markets is much more focused. I think on the margin, we're always assessing what are the assets in our portfolio that have the best strategic fit for long-term growth and margins. And relative to -- we still have some work to do on our balance sheet. I think you'll still see some refinement of the portfolio. But I think it's much more likely to be modestly sized things that just further accentuates strategic focus and help get our balance sheet to -- we'd really like to be at like 2 -- 2.5x net debt to EBITDA by the next year. That probably means something like $500 million-ish of asset sales, ideally, assuming M&A markets are hospitable to something like that.

Yes. You mentioned maybe not done pruning the portfolio, nothing super substantial but in efforts to be a more streamlined company. So is it fair to think that pruning will kind of remain on that industrial side, not necessarily within Tools & Outdoor?

I think there's modestly sized assets in either portfolio where there's an opportunity for that. And I think pragmatically at least in the very near term, in the next 1 to 2 years as we're working the balance sheet. We're just going to have to look at strategic fit, business readiness and M&A market hospitality for those transactions. And so I think because the M&A markets are relatively thin at this point in time, I think, it could be something small from either. I don't think there's a clear bias towards one or the other because I think pragmatically, we're going to have to go to where the buyers are.

Yes, that makes sense. I guess kind of on the other side of that, as the balance sheet continues to improve with EBITDA ramping, helping the leverage metrics, cash generation coming through, are there areas that you would like to see strategic bolt-ons or technology added when the balance sheet is in a position to do so?

Yes. I mean I think the places where we see the greatest avenues in our T&O business is power tools and handheld outdoor. If there was something that was a good complement or we can get good synergies, that would be something that would pique our interest. I think on the industrial side, automotive and solar are big things for us. But I'd say we have a lot of work both on our balance sheet and both on just getting our leadership teams and our managerial teams humming before we're in an acquisition mode. I don't see that as a '25 thing for sure, probably not even a '26 thing. Just from a human readiness as much as a balance sheet readiness thing.

Yes. I guess kind of turning back to the organic business. You guys started to do more promotions over the last 12 months. Can you talk about the importance and benefits of kind of turning that back on, maybe along with the marketing spend, particularly as you're trying to drive the more premium product lines?

Yes. I mean, our business has points in times of the years around holidays, where you need to be participating there from a share perspective. And during the most challenging parts of our supply chain challenges, we just didn't have the product availability. And your channel partners are really looking 6-plus months out for firm commitments and confidence that you're going to be able to supply against these promotions. And so until really the back part of last year, we weren't on our front foot. And we are -- we haven't really changed. We've kind of -- I'll call it gone back to our prior rhythms. And by this holiday cycle, we'll be kind of fully through that. And the reason it's important is you need to have secondary placement and you need to have offerings at key holiday points in time. I would say, for us, we're kind of getting back to where we were. And I'd say for our channel partners and the broader industry context. I'd say the industry is kind of back to a pre-COVID dynamic on that. I don't think there's something that's stayed elevated nor has it gone down to some different low point. I'd say it's kind of back to where it was.

Yes. I mean kind of -- almost intuitively, our first thought when you hear promotions, I think, okay, not good for gross margin. But you guys are able to do it, obviously, to filter spend into the more premium categories. Is that a positive trade-off for gross margin for the company?

I mean, it ends up being biased towards power tools, and therefore, it tends to be -- even with the change in price point, it tends to be margin accretive. It also is a way to build merchandising billboards with your channel partners. And so I think it's key to brand building as well.

Yes. Maybe turning to the market. Tools & Outdoor turned positive in Q2 for the first time in 2 years. I guess when you look at those markets, maybe separating the consumer versus the pro. First on the consumer, been under pressure for a while. The data, particularly on goods spending, it doesn't seem like there's a ton of strength there. And I guess what are you guys seeing on the consumer side? Any rate of change.

Yes, there really isn't. I mean, I'd say we welcomed our Q2 performance. It was above our expectations as well. It was really on the backs of, I think, good execution in our handheld outdoor and electrified walk behind outdoor, in particular, in U.S. retail. And so you had the fact that we won some product placement. We had some good innovation. We have great margins on those products, and we saw great demand. I'd say the underlying tools demand, pro and consumer together has been soft and choppy all year long, and it remains there. I mean the pro is marginally stronger. The consumer has been pretty weak. I don't think a dynamic has changed in a meaningful way. It's kind of stayed weak. We haven't -- we expect lower interest rates to be helpful, but they're not helpful yet in a meaningful way. And that's probably the way it trails out all the way through the holiday season, is kind of a soft macro. I mean we've had good DEWALT and in particular, good DEWALT power tools performance relative to the overall macro. And that's why when we say things like the pro has hung in there, we see that and feel that. But overall, the demand picture has been choppy and muted by the DIYers. And I think the interest rates -- we're starting to see interest rates have an effect on housing, but it's the early days of that. And I think it's going to take until sometime in the first half to see interest rates really change the construction picture broadly.

Yes. I mean, I guess is that what you would tell people to look at, the construction picture? We're trying to kind of think about what gets the -- I guess, the pro better and what gets the consumer better, like we're trying to be macho...

I think construction activity broadly, not just residential, both commercial and residential. I think it's -- on the commercial side, it's do you see new and existing home sales and remodeling uptick. We're starting in the earliest days now with new home sales, see the benefits of already lower mortgage rates, but it's not a groundswell yet. And then on the commercial side, it's the rate of people getting financing on commercial projects. I think those are the things to be paying attention to.

Yes. You guys have talked about $300 to $500 of incremental spend coming in the next, I guess, maybe 3-ish years. I guess where are we in this journey? And where is the spend going?

Yes. Spend is going in a few areas. It's obviously not only in our tools and outdoor business, but it's probably [ 6 ] to [ 7.5 ] of every dollar is kind of in that direction. And it's around increasing innovation, increasing field resources both for sales and product support and increasing brand support of our 3 biggest brands, DEWALT, STANLEY and CRAFTSMAN. And we're probably -- as we sit here today, we're probably in the 250-ish deployed since we started on this journey in the early parts of '23, the latter parts of '22. And we are protecting -- we're really trying to protect that. But we're also trying to meter it out at a rate where like, for example, when you're putting resources in the field, how quickly can you train them, how quickly can they be reasonably productive. So we're not just kind of throwing the money there no matter what. It's a very thoughtful -- and Chris Nelson and his team are being thoughtful of both what trades are they chasing and what geographies are they chasing and where is the macro kind of disproportionately strong, right? You certainly have markets like Texas, which is a very -- still a very strong commercial and residential market more so than other places. So they're just being very judicious about where they go with those dollars. But we feel like for the long term, we need to be investing in innovation and brand health, and we're going to continue doing that. We'll be smart. We're not going to invest ahead of product -- our ability to make it productive. And we're not going to compromise any one year's cash flow or EPS. But we're also not going to go into '25 and squeeze '25 and compromise longer-term growth.

Yes. I mean -- so I guess kind of following up on that, as you guys kind of toggle between is this a $300 million spend? Is it $500 million spend? Is it just a function of where we see opportunities to get a return? Or is it balanced versus, okay, well, it depends on where market demand is, it depends on where gross margin is?

Yes. I'd say it's governed predominantly by the rate at which we can make it productive and by the macro. And so I think it kind of gets somewhere in that [ $300 million ] to [ $400 million ] more closer to the [ $500 million ] and this -- this horizon through '25, but not because we're trying to optimize year-end EPS or EBITDA, it's more the rate at which either our people can ramp up or our channel partners can take new things, right? Those are more of the governors on it.

Yes. I mean maybe turning to the market and the market positioning, which drives a ton of investor questions to us. And from the outside looking in, it seems like it's always been a pretty competitive market, selling into big box. I guess, do you think competition has picked up over the last 2 to 3 years? Or maybe Dennis could provide a longer-term view beyond you?

Do you want to take it or I'll start?

Yes.

Okay.

Yes. I mean this has always been a competitive industry, particularly if you think about power tools. There's 4 major global players that you tend to see in most markets. A lot of them have their areas of strength if you think about like Europe for one player or Asia for another or North America. In our case, and maybe one other. But I don't know that it's gotten more competitively intense. What has occurred, though, is that there are 2 players, DEWALT included, that really have differentiated themselves on the breadth of their systems, the amount and the quality of the innovation that's being brought to the market and the ability to kind of go after various channel and geography opportunities around the world. And so as you think about that, that's really not a new thing necessarily, but there definitely is an area where there are 2 players that are differentiating themselves maybe differently than what you would have seen in the past.

Yes. And I would -- the thing I would add to that is I don't -- I haven't -- I'm obviously less than 2 years in. I haven't noticed a big change in the dynamics. And I would tell you like we're in a [ STRAP ] planning cycle and doing a lot of end market outreach to channel partners, the big construction companies, small construction companies, end users. And there's a true willingness to pay for productivity enhancements, safety enhancements or durability enhancements. And while people would put DEWALT up there with the top brands, I would say that the professional user base is still looking for more on those fronts and has a willingness to pay. And so I think it's a good signal too, if you innovate in a focused manner with the end user insight, you're going to get paid for your innovation if it's good innovation. And I would also say, we just lived through 24-plus months of a soft macro and inventory overhang. And we've seen pretty good pricing discipline. So I think that's kind of a healthy signal of people starting to get -- manufacturers being focused on innovation, brand building, in-market support as the way to differentiate and compete as opposed to price.

Yes. I guess you talked about how the pro -- the pro wants more and we'll pay for more. Obviously, I would -- I think productivity has never been more important than it is right now when you see what's going on with wages. But I guess when you say they want more, like what do they want? Is it battery, like what specifically is it? Because I imagine that that's kind of where you're funneling a lot of your investment dollars?

There's obviously certain applications where safety resonates, but productivity and durability are the things that they thirst for. And if you can bring something to the table whether it's product-oriented and/or field support oriented on the durability side, that is what they value more than give me the cheapest price point. Because in the scheme of things, the tool costs, while it's not trivial, it's not the biggest issue they face in their job, and they can monetize productivity and durability.

What about on the battery side? What investments are you guys making there? Or is there any opportunity you see there?

I'll let Dennis -- I mean, there certainly is. What I would tell you is battery is something we're always mindful of, and there is a switching dynamic. But I'd say increasingly, productivity and durability are stronger brand pillars than just pure battery, but that doesn't mean that there's -- certainly being able to bring battery technology up to a greater level to take out alternative, whether it's compressors, pneumatics or other things, has certainly been an unlock for us. And a big unlock because we have a bunch of concrete tools that we're launching this year that were at World of Concrete earlier this year, has been a great unlock for us in increasing our TAM via battery technology, but I think it's more how do you use battery to actually bring the other benefits that I talked about around productivity or durability as opposed to its purely a switching dynamic, which I think people get caught up in.

Yes. The technology continues to get better. If you think about, like as an example, we brought pouch. That allows you to do what Pat talked about and get higher power, that in conjunction with the engineering that takes place to optimize that battery performance, optimize the motor performance has allowed us to go up the power curve, continue to take out higher levels [ with ] larger tools and applications. And I don't think that stops. I mean there's new battery technologies that are going to be applied later this year as well that will help unlock that. It will likely be within existing systems that you see today. but you continue to get better batteries that can unlock the types of functional attributes that Pat talked about.

Yes. Maybe turning back to market positioning. I think -- I know a year ago, 2 years ago, there was tons of market skepticism on the gross margin recovery. I think investors are more positive there just because you guys are delivering ahead of schedule. The biggest concern now from investors that I hear is how can STANLEY grow volumes 2 to 3x the market when you have competitors that are just willing to just run at structurally lower margins? How do you answer that?

Yes. We feel like I take the DEWALT corollary. DEWALT has been, over the last 10 years, growing at about an 8% CAGR. We've had 5 quarters in a row of low to mid-single-digit growth in what we would measure as a down market. And so -- it's certainly on our whole portfolio, because we have some brands that aren't as healthy as DEWALT, a different challenge. But I feel like with the end market user input we're getting and the innovation engine that we have, we certainly feel like DEWALT is and can continue growing ahead of market. And then we have to improve the brand health and innovation and cost position of some of our other brands. But we're talking about returning to mid-single digit or better growth which was part of our past, and we think very much can be part of our future on the basis of the innovation engine that we have.

And I think there's -- if you think about the transformation, it was really designed to get us back in an environment where the macro is going to be relatively choppy. And so that's what we've been living through and that's what we're doing, but no means is at an end point. And I think as Pat and Chris have come into the business, they see lots of opportunities beyond the transformation to take the earnings power and the growth potential of the company to higher levels.

Yes. When I -- when people look at the growth of your tools business versus some competitors are out there, even the market that's out there, it does seem like you guys maybe do better with the consumer, some competitors maybe do better with the pro. You mentioned the pro may be wanting more. Do you think the fact that the pro has been good and the consumer has been soft, has been a headwind to your growth relative to peers or the market as a whole?

I think there's probably an element of that on our total portfolio, but that's because we have some brands like CRAFTSMAN and Black & Decker in there that one, could have better health and innovation, but are very susceptible to that chunk of the market, and they're pretty sizable brands for us relative to a competitor you might be referring to as a percentage of our total portfolio. But we don't think it's a structural dynamic that we have a permanent headwind in front of us. We have a very strong brand in DEWALT. It's roughly half our tools portfolio. We have every confidence that we beat the market with that. And we see opportunity in these other brands to really reenergize them. We probably weren't investing in them as effectively and weren't managing them as effectively as they could be managed.

Yes. Maybe last one on -- up on time, but maybe last one on price. I think price has generally held in a good deal better than anyone would have thought a year ago. We had -- we had excess inventory, weak demand and prices held in. And I guess, one, why do you think that is? And then two, what is the outlook for price going forward?

Yes. I think, first of all, I'd say the pricing dynamic we talked about a little bit earlier, pretty disciplined pricing dynamic. I think that's a few things. I think in tools broadly, it's not a huge PP&E base. It's not about I need volume to make my PP&E productive. So chasing volume through price isn't that smart. Pricing can be really sticky. So discounting to move inventory, not that smart. And I think it's a credit to the channel partners and the manufacturers that we stay disciplined. I don't see that changing. We're heading into the holiday season, and there's nothing we can kind of sense out there that has really changed the pricing dynamic all that significantly. And I think we're at the stage of this journey of our transformation where we're really excited about finishing the first 3 years of it that we set out in '22. We are very confident we get to the place that we want to go to. And right now, a relatively new leadership team working on the path for '25 to '27. And we would expect we're probably going to have a Capital Markets Day later this year, sometime kind of late -- mid- to late November. And we feel like, as we've been saying today, 35% margin is not an endpoint. We see opportunity beyond that. And we're really pivoting towards growth, and we look forward to talking more about that as we lay out '25 and beyond.

Well, thank you. I look forward to that as well. We're up on the 30 minutes, loved the conversation. Really appreciate you guys.

Thanks. Appreciate the time. Thank you.

Thanks.

Thanks. Appreciate it.